The relationship between the motor carrier and its owner-operator independent contractors is a complicated one at best. In recent years, state and federal agencies and labor unions have come together to challenge the independent contractor classification. Should a driver operating as an independent contractor be classified as an employee, state and federal agencies can collect wage and salary taxes and require the motor carrier to report driver wages to the IRS.
Misclassification becomes an issue when there is a loss of cargo or an accident. Is the independent contractor covered under the motor carrier’s workers’ compensation policy? Are they eligible for general employee benefits, like paid time off, salaried vacation days and short-term disability? If an independent owner-operator is being treated like an employee, they can challenge the motor carrier in a court of law to cover their loss expenses and disability.
Once an independent contractor is classified an employee, the rest of the fleet can be similarly reclassified as well—spreading significant exposure and increasing costs. This guide is intended to help motor carriers avoid fines, penalties and reputational damage resulting from worker misclassification.
LEASE AGREEMENTS ARE CENTER STAGE
Clarifying the Classification
At the core of the owner-operator independent contractor debate is the lease agreement. As the official contract between the motor carrier and its drivers, the lease agreement serves as the main piece of evidence should a misclassification suit arise. It will be the motor carrier’s first line of defense to prove the independent contractor is, in fact, independent and not an employee.
9 KEY LEASE AGREEMENT POINTS
Unfortunately, many motor carriers are still using legacy lease agreements with outdated language that contradicts current motor carrier form and auto liability policies. Outdated agreements could render motor carrier coverage null and void or vice versa. To avoid any conflicts, lease agreements should be reviewed annually by an attorney and updated every few years.
Lease agreements between a motor carrier entity and an owner-operator independent contractor should be clearly spelled out.
- The owner-operator is an independent contractor, not an employee.
- When the motor carrier leases a vehicle to an independent contractor, the independent contractor is still free to do business with other motor carriers.
- The independent contractor has the ability to refuse loads.
- The independent contractor has the ability to choose his own routes.
- The independent contractor must be responsible for the maintenance and upkeep of the vehicle.
- The independent contractor must be paid either a percentage of the load, a percentage of the load revenue or in another form that is not an hourly wage, i.e. by the mile, etc.
- The independent contractor is required to hire any person they need to help in performing the duty of their job, i.e. a helper to load and unload the truck, etc.
- The independent contractor is required to procure their own workers’ compensation or occupational accident policies with limits of $1 million. If the motor carrier procures the insurance policy for the independent contractor to purchase, make sure the lease agreement states that the coverage is required, but it doesn’t have to be purchased through the motor carrier.
- If the motor carrier is charging an administration fee, specify how much and what it is for
Beyond the Lease Agreement
Even when the lease agreement is optimized, the owner-operator independent contractor can still be misclassified as an employee if the motor carrier acts as an employer toward the driver. Motor carriers often have both employee drivers and owner-operator independent contractors, which adds to the confusion.
“Number one, you have to have a good lease agreement, but number two, you have to follow it; you have to do what it says you’re going to do,” said Robert Moseley, attorney with Smith Moore Leatherwood. “A lot of motor carriers get in trouble because they manage by memo. If I’m your employer, I can tell you I want you to fuel at this location or get your tires rotated at this location, but if you’re an independent contractor, the management just can’t roll out a memo to change the terms, you actually have to have the lease agreement re-drawn.”
Some typical pitfalls for motor carriers acting as employers to their independent contractors include:
- FORCED PURCHASES Have you asked the owner-operator independent contractor to buy tires, parts or fuel up in a certain location with your motor carrier discount?
- ESCROW Are you paying the quarterly interest and crediting each driver’s escrow account, as required by federal regulation 376.12?
- LEASING/PURCHASING Are your drivers leasing their trucks from you? Some states, like South Carolina, don’t allow owner-operator independent contractors to lease/purchase their trucks from the motor carrier they drive for. If you are leasing/selling to a driver that is hauling your load, consider the following: Who will take care of truck maintenance? Where will it be performed? If the owner-operator independent contractor is locked into a lease with you both for his load and his truck, is he really independent?
Moseley suggests drawing up lease agreements load to load. In this scenario, the agreement can be extended and renewed, but also terminated easily. “You have a master agreement that stays in place with rate of pay, but by definition the independent contractor agrees to renew the contract each time they take a new load. There’s no paperwork as the result of a new load – the driver just takes a new assignment.”
From State to State and Across the Country
Independent contractor status is governed by states and, therefore, lease agreement language will vary by location.
For example, Florida and Tennessee state laws view the independent contractor working for the motor carrier as independent, while North Carolina state law, on the other hand, deems the owner-operator independent contractor a full-fledged employee.
In Illinois and Oklahoma, a separate form must be signed by the driver that says he understands his independent contractor status.
California requires owner-operator independent contractors to sign a new lease agreement every 90 days.
States will also weigh in on insurance coverage requirements. Independent contractors who reside in New York, New Jersey, North Carolina, Massachusetts, Colorado and Nevada must have their own workers’ compensation policies, but motor carriers aren’t required to provide it. In these states, lease agreements should include a clause requiring the owner-operator independent contractor to procure their own workers’ compensation policy.
Federal government agencies also have an interest in owner-operator independent contractor classification. Recently, the Department of Labor (DOL) published guidance regarding independent contractor classification according to the Fair Labor Standards Act (FLSA). While the DOL’s guidance does not carry the force of regulation, the agency makes their position clear in this matter that when contracting with an independent contractor, the employer must follow these guidelines or face worker complaints that can lead to increased audit activity—neither of which are good for business. Taking into account the large number of driver owner-operators, this guidance could have a major impact on the industry.
CASE IN POINT: A Lease Agreement Magnified
HUB International Transportation Insurance Services works with motor carriers to secure necessary coverage and optimize their business. Recently, while reviewing a standard lease agreement, HUB Transportation discovered:
- The language in the agreement didn’t even apply to the motor carrier using it. It specified a flatbed when the company doesn’t have flatbeds.
- In several instances, the agreement referred to workers’ compensation coverage, when the motor carrier meant occupational accident coverage. This discrepancy could render the independent contractor an employee, potentially requiring the motor carrier to extend unlimited workers’ compensation benefits to the independent contractor, rather than the two-to three-year coverage limits typical to occupational accident coverage.
- The contract specified that the motor carrier would “provide” items to the independent contractor, including fuel and new tires. Providing these types of services to the independent contractor is likely to render them a full employee should the contract come under scrutiny. Instead, motor carriers can require the independent contractor to keep a certain tire tread or amount of gas in their tank, but should not provide it for them.
Unfortunately, these findings are typical. Make sure your lease agreement is comprehensive and consistent with your business operations.
Motor Carrier Coverage
Like any other employer, motor carriers will need liability insurance policies to cover their business practices and employees. The following are a few coverage types (both required and elective) specific to motor carriers:
- AUTO LIABILITY COVERAGE Policies cover any type of property damage and bodily injury to third parties and protect the “public.”
- GENERAL LIABILITY COVERAGE Policies provide liability coverage for events that happen outside and away from the motor vehicle, including premises, completed operations, products, warehousing, etc.
- MOTOR TRUCK CARGO COVERAGE Policies cover cargo in your care, custody and control against damage or loss. Forms are different and not regulated. Some high priced commodities like electronics, alcoholic beverages and clothing may not be covered, unless specified at the time of purchase.
- PHYSICAL DAMAGE OR COLLISION COVERAGE Policies protect motor vehicles you own or lease for comprehensive losses and collision on vehicles that are scheduled for this coverage.
- CONTINGENT LIABILITY COVERAGE In the event that the owner-operator independent contractor sues for employee misclassification status, this policy will pay the motor carrier’s defense and if the driver is deemed an employee, it will typically pay the statutory workers’ compensation benefits as well.
- CONTINGENT ERRORS & OMISSIONS COVERAGE This policy indemnifies a motor carrier, in defense of a misclassification suit, but not for workers’ compensation claims. It covers IRS taxes and fines, a workers’ compensation audit, state wages and hours taxes.
- EXCESS COVERAGE Additional limits can be added to most of the above-mentioned policies to provide more coverage as needed, similar to a homeowner’s umbrella policy.
“There are a variety of policies that are pertinent to the motor carrier, depending on their particular exposures,” said Dennis Templeton, CPIA, TRS, CIC, Senior Vice President and Chief Sales Officer, HUB International. “It’s critical for the motor carrier to work with a broker who knows both their business and the insurance business, otherwise the motor carrier runs the risk of being underinsured or having unwanted gaps in coverage.”
CASES IN POINT: Tales From Two Misclassification Lawsuits
CASE I: In 2014, following multiple misclassification lawsuits and labor union complaints with the National Labor Relations Board, logistics provider Hub Group Trucking (not related to HUB International) voluntarily converted approximately 350 of its California owner-operator independent contractors to employee status, with a settlement that paid out $9.5 million in total to its affected drivers. Hub Group Trucking President Dan Burke said: “The legal climate in California is becoming unfavorable to the common trucking industry practice of using independent truck drivers.” Experts say this move could be a precursor to industry changes nationally.1
CASE II: In one 2014 case that involved drayage carrier Seattle Freight Service, a district judge ruled that 25 drivers who brought complaints of state law wage violation should in fact be classified as owner-operator independent contractors—not employees—who deserved wage protection based on the Fair Labor Standards Act. The district judge used the following six-part test to arrive at the owner-operator independent contractors classification:2
- Control of manner and means in which work is performed
- Opportunity for profit or loss based on managerial skill Investment in equipment by the individual
- Performance of the working relationship and integral nature of the job performed relative to the total
Best Practice Review
Working with independent contractors can be a liability for a motor carrier, but it doesn’t have to be. Know your risks and exposures. Make sure you’re working with an attorney to draft a current and all-encompassing lease agreement. Know the state laws relevant to your independent contractors. Treat your drivers – whether employees or independent contractors – accordingly, and work with an experienced insurance broker to purchase the right policies and optimize your business practices. Your independence and your business depend on it.
HUB International Transportation combines national reach with local service to address the needs of large fleet, small fleet, single owner and tow trucking operations. We have exceptional market access, educational resources, and a deep bench of experts who are solely focused on serving the trucking industry.
1. Bair, Ron. The Paradigm Shift in the Use of Owner-Operators.
2. Bair et al